By Sujata Rao and Karin Strohecker
LONDON (Reuters) - Russia's economy is displaying "encouraging signs" of recovery and should return to growth in the first quarter of 2017, though it will take years for inflation expectations to be anchored, the central bank's first deputy governor said on Tuesday.
Growth was flat to slightly positive in the third quarter and fourth quarter data will likely show the same, Ksenia Yudayeva told Reuters in an interview on the sidelines of an investment conference organized by the Moscow Exchange in London.
"We see recently encouraging signs in the economy, recent PMI data was very strong, Rosstat has just published its indicator of business sentiment, which was also very strong," Yudayeva said.
"I think there will be positive growth in Q1."
Russia's export-dependent economy sank into recession after it annexed Crimea in 2014 and took a hit from Western sanctions and falling oil prices.
The central bank, which has won praise from investors for holding the line on its inflation target, has pledged to keep its key rate unchanged at 10 percent till year-end. It next meets on Dec 16.
A Reuters poll forecasts a 50 bps cut in the first quarter of 2017.
Yudayeva also said she was confident the bank's inflation target of 4 percent by end-2017 would be met, adding the central bank had "all the tools" required.
However there are risks to this target, she noted, citing the possibility of higher budget spending ahead of 2018 presidential elections and faster consumer credit expansion.
"Inflation expectations are high and not anchored, definitely not anchored at 4 percent... and this is what we need, to not only hit the inflation target but also anchor expectations... and that will take several years," Yudayeva added.
Russia has also benefited this year from oil's price stabilization and a recent deal between major crude producers to curb output has raised expectations of higher prices next year. The central bank has a medium-term oil price forecast of $40 a barrel.
Yudayeva said policymakers were due to discuss that forecast in the next two weeks alongside its second possible scenario that oil prices could average up to $55 a barrel.
"The probability of the second scenario has increased somewhat," she said in response to a question on whether the bank could raise its medium-term forecast.
The rouble <RUB=> has firmed around 14 percent this year against the dollar after sharp falls in 2014 and 2015, though it could suffer a setback if emerging markets continue to see an investor exodus.
Some also fear volatility from state oil firm Rosneft's 600 billion rouble ($9.4 billion) bond, placed this week. A similar end-2014 bond caused a currency selloff due to expectations the company would convert the bond proceeds into dollars.
Rosneft is widely expected to buy its own 19.5 percent stake from its parent company Rosneftegaz and has said bond proceeds will not be used for the purchase.
Yudayeva noted those fears around Rosneft had proved unfounded last time.
"It looks quite calm, there is much more confidence on markets than two years ago," she said.
She also saw the rouble as less vulnerable to a strengthening dollar than before, thanks to stable oil prices and greater confidence in policy.
"Two years ago was vice-versa," she added.
Asked about the timing of a planned yuan-denominated OFZ bond to be issued on Russian domestic markets, Yudayeva said the issue would happen but the probability of a deal before year-end "was not that high".
(Editing by Raissa Kasolowsky)